The European Commission, as part of its ambition to digitalize society, is powering a movement for the digitalisation of finance. With this goal in mind, the European Commission, together with the European Central Bank (ECB), is studying the question of issuing a digital euro. In this article, Dr2 Consultants shares some insights into the background of the digital euro plans and the potential impact on the FinTech industry.
As part of the EU’s efforts towards accelerating the development of a strong European digital finance sector, and taking into account digitalization, emerging innovations in payments provided by the FinTech sector, and the growth of crypto-assets, the European Commission is evaluating, together with the European Central Bank (ECB), the need for and feasibility of issuing a digital euro. Their decision will also be informed by the 8.000 responses to the public consultation that ran between October and January 2021.
The official decision whether to pursue this project will come mid-2021, but its uptake seems inevitable, considering the support for the project at the Commission and at the national level, and in the context of Central Banks from third countries which are also starting to issue their own digital currencies.
Why a digital euro?
The need for a digital euro comes from the increasing digitalization of financial services and is made even more pressing by the rise of crypto-currencies offered by private foreign actors, combined with the COVID-19 pandemic which has accelerated the shift away from cash.
A digital euro would be considered a safer alternative to crypto currencies, such as Bitcoin or Ethereum. The European Commission and the ECB have expressed their concerns regarding crypto-currencies because of the volatile aspect of their price, since their value is not intrinsic but based on demand, and because they are mostly issued by foreign actors. On the contrary, the digital euro would be backed by the ECB and by national central banks of Member States, combining the efficiency of a digital payment instrument with the safety of central bank money.
The digital euro would be equivalent to the banknotes and coins we know today, but in a digital form. It would be an electronic form of payment, coming as an additional means to pay next to cash as we know today, and issued and guaranteed by the European Central Bank and national central banks.
What are the key challenges?
The issuing of a digital euro is however not without challenges. The main challenge will be to prevent people from completely abandoning traditional savings accounts in favor of digital wallets, weakening traditional commercial banks of the eurozone. To mitigate this risk, the ECB wants the digital euro to be only a means of payment, and not a form of investment that could compete with other financial instruments. There are also concerns with regards to privacy and security. If the ECB and the Commission decide to go through with the project, the regulatory framework surrounding the digital euro will need to include measures to mitigate those risks. Further consultation with stakeholders will most likely have to take place to further assess the risks and continue to define the various use-cases.
Next steps
Although the decision to pursue a digital euro is not yet official, Dr2 Consultants’ digital team is keeping a close eye on the developments as the EU is already paving the way for it, especially as it tries to regulate and limit the use of crypto currencies within the Single Market. The Commission proposal for a regulatory framework for crypto assets, published in September 2020, puts all significant crypto currencies under the supervision of the European Banking Authority. The ECB is also calling for higher regulation of crypto currencies, and especially of stablecoins (crypto currencies whose value is tied to an outside asset, such a national currency or gold), as Big Tech such as Facebook aim to launch their own digital coins.
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Potential impact on the FinTech Sector
The digitalization of finance is intrinsically linked to the FinTech sector. The term, a combination of “financial” and “technology”, refers to the use of digital and new technologies to ease or fasten financial operations. Most FinTech firms are start-up firms that have managed to enter a previously closed financial ecosystem. The FinTech industry has been growing rapidly, mainly thanks to an increased need for on-demand and digital finance but also regulatory changes such as the Payment Services Directive 2.
FinTech firms have created and brought on the market a variety of new means of payments and financial services. These innovations are slowly being regulated, either directly through financial policy, but also through policy developments targeting what fuels these innovations (e.g. regulating AI technologies or the way we access and share data). The European Commission will continue down that path through its Digital Finance Strategy, and by supporting new large-scale project such as the digital euro.
As explained by Mr. Fabio Panetta, Member of the Executive Board of the ECB, the key feature for success will be to make the digital euro interoperable with private payment solutions, making it possible for all market participants to offer products to European users. Dr2 Consultants expects that the uptake of the digital euro would create commercial opportunities for FinTech companies, but also likely attract new players to the market, creating more competition for existing firms. Especially, traditional banks could be inclined to up their digital capacities and services further, through innovation or acquisition.
Dr2 Consultants continuously monitors the developments in the discussion on digital finance and supports its clients on these matters. Should you be interested in further information on the digital euro and how it could impact your business, you can reach out to Dr2 Consultants at info@dr2consultants.eu or find more information on our website.
